Purchasing a new home can be an exciting but stressful time in your life. It provides an opportunity for a fresh start, but there are plenty of fine details to figure out along the way. For example, it’s important to select the right type of funding so you can purchase your home quickly and encounter no issues. The decision about when to sell your current home and buy the new one may affect the right type of loan for you. Learning about cross collateralization, bridge loans, and cross-collateral bridge loans can help you make the right decision.
What Is A Cross-Collateral Loan
A cross-collateral loan is a financing technique that uses one loan’s collateral to secure another advance. This is often common when seeking a second loan from the same lender. For example, you might use the collateral from an automobile loan to get an advance from the same lender to buy a new home. As a result, if you stop making payments on either your car or home, the lender can take back either asset. This allows the lender to reduce any risks that can arise from allowing customers to borrow funds.
Cross-collateral loans are most common with auto loans or when borrowing from a credit union. However, they also occur with construction loans if a borrower owns multiple properties. This is more common with commercial real estate lending processes, but you can also use cross-collateral loans for a residential mortgage. For example, taking out a second mortgage, such as a home equity loan or a home equity line of credit, is a type of cross-collateral loan. The home serves as collateral for two separate debts, and it’s possible to cross collateralize the properties with two different lenders.
Advantages and Disadvantages of Cross Collateralization
Cross-collateral clauses primarily provide additional protection for lenders. However, they may also provide some benefits to borrowers, too. Some potential benefits of getting a cross-collateral loan include:
- Being able to fund multiple projects or properties with one loan.
- Possibly qualifying for a higher loan limit.
- Potentially receiving approval for risky transactions.
- Using additional collateral to offset a high loan-to-value ratio.
It’s important to consider the potential disadvantages of cross collateralization before seeking this type of loan. This may include:
- Becoming indebted to the lender even after paying off the loan completely.
- Defaulting on all loans from the same vendor because you default on just one loan.
- Having a limited ability to sell the paid-for property.
- Losing an asset used as collateral, even if you’re current with payments on the loan.
What Is A Bridge Loan?
A bridge loan—also called gap financing, interim financing, or a swing loan—is a short-term loan a borrower can seek for quick funding so they can purchase a second property before they’re able to sell another property. This creates a bridge between this gap in the lending process. It allows you to purchase a new home successfully by using the equity of your current home to receive a new loan from the lender while waiting to sell it to a new owner.
Advantages and Disadvantages of Bridge Loans
Bridge loans can be appealing because you can receive the funding you need between buying and selling projects or properties. It’s helpful to weigh the pros and cons of this type of loan to determine whether it’s the right financing path for you. Some potential advantages of choosing a bridge loan include:
- Having flexibility in your ability to make purchases.
- Potentially delaying second payments until you have the cash flow to pay on the bridge loan.
- Receiving quick access to financing through a fast-closing process.
- Removing contingencies when placing offers on new homes or properties.
- Utilizing your available equity to purchase a new home or property.
However, it’s also important to consider possible disadvantages of bridge loans, which may include:
- Requiring a substantial amount of equity to qualify.
- Requiring a strong credit history and stable finances to qualify.
- Paying higher interest rates because lenders have less time to collect interest.
- Potentially making double mortgage payments on both loans.
What Is A Cross-Collateral Bridge Loan?
A cross-collateral bridge loan puts up the first home or property as collateral so you can secure the second loan to purchase a second home or property. It provides short-term cash to bridge the gap in funding while waiting to sell your first home and beginning the process of purchasing another one. Including a cross-collateral clause on a bridge loan often protects lenders, as they can help ensure a borrower continues to make payments on both loans.
If borrowers stop making payments on a loan, a lender can pursue action for the collateral put up for the loan. For example, imagine a couple wants to purchase a new home, but they’re unsure if they’ll be able to sell their starter home first. By seeking a cross-collateral bridge loan, they’re able to secure the funding to buy a new home while they wait to sell the first home, provided they can make payments on both loans.
Why is Getting a Cross-Collateral Bridge Loan Useful?
Cross-collateral bridge loans are most useful when you’re looking for a way to finance the purchase of a second home or property before selling one. This is often helpful if you find an ideal property before selling the first one and require funds to make up the difference or experience issues selling your current property. Cross collateral loans may also be a good option for any contractors looking for funding to begin their next project before completing their current one and receiving a return on their investment or selling the project to another owner.
Learn More About Cross-Collateral Bridge Loans
Interested in learning more about your loan options? Contact us today at Titan Funding. Our team of experienced professionals in Boca Raton, Florida, have the expertise business and individuals like you need to make informed decisions about borrowing and lending. Reach out today and let us know how we can best help you succeed.